CBA Posts Steady March Quarter With A $2.3B Profit

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CBA Posts Steady March Quarter With A $2.3B Profit

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  • Strong growth in home loans, household deposits, business loans and business deposits
  • Positive trend reflects low interest rates, a sound property market and origination quality
  • CBA is cautious about higher interest rates, inflationary pressures and supply chain disruptions
  • Common Equity Tier 1 (CET 1) ratio remains prudentially sound at 11.1 percent
  • CBA is well provisioned for future loan losses and credit quality of loan originations is sound and well positioned to respond to future challenges.

Third Quarter Trading Update

CBA earned an unaudited Net Profit After Tax (NPAT) of $2.3 billion in the March quarter, being 2 percent lower than the corresponding March quarter in 2021. Compared with the quarterly average earned in the 6 months of the first half year ended 31 December 2021, the result was flat. Interest rate margin pressure, arising from home loan margin compression from higher swap rates and pricing competition, impacted the result. Higher swap rates reflect the Bank’s cost of funds in the wholesale market and interest rate hedging costs.

The Bank benefited from a strong domestic economy in the quarter, with impressive growth achieved in home loans, household deposits, business loans and business deposits. Home loans grew by 8.5 percent and household deposits by 13.5 percent, compared to March 2021. Business lending growth was equally impressive at 12.6 percent and business deposits at 13.5 percent, compared to the prior year.

The credit quality of the loan portfolio remains sound, and loan impairment expense remained low in the March quarter. The percentage of Troublesome and Impaired Assets (TIA) declined from 0.67 percent of Total Committed Exposures (TCE) at March 2021 to 0.51 percent at March 2022, and down from 0.53 percent at December 2021. At 0.51 percent of Total Committed Exposures, TIA were $6.6 billion. This positive trend reflects low interest rates, a sound property market and origination quality. Credit card and personal loan arears began to normalise in the March quarter, in line with seasonal trends. However, the Bank ominously stated that the Group is maintaining a cautious approach to managing potential risks, including higher interest rates, inflationary pressures and supply chain disruptions.

Operating expenses also appear to be well managed with headline costs down 2 percent, or 1 percent including remediation costs. Interestingly, the bank noted that the benefit of higher annual leave usage contributed to lower expenses in the March quarter.

The Bank remains well funded with household deposits comprising 74 percent of the funding book, up from 73 percent 3 months earlier. This is up from 55 percent in 2008 and reflects CBA’s very strong domestic franchise among Australian households. This 1 percent growth rate in household deposits represents $8.5 billion, for the March quarter. Household deposits are a reliable source of funding and are considered more ‘sticky’ (stable) than wholesale deposits that are more price sensitive.  Most of the CBA’s wholesale funding is long term with a weighted average tenor of 4.9 years.

CBA is well capitalised with its Common Equity Tier 1 (CET 1) ratio at 11.1 percent, down from 11.8 percent at December 2021. This decline in the Bank’s capital ratio in the quarter is largely driven by payment of the $3 billion interim dividend to the Bank’s 870,000 shareholders during the reporting period.

Looking Ahead

Although the Bank pointed to the threat of emerging risks, including higher interest rates, inflationary pressures, and supply chain disruptions, it is well capitalised and well-funded and growing strongly on all fronts.

CBA’s disciplined approach to capital management, which includes prudential provisioning for future loan losses, while maintaining the credit quality of its loan originations in the face of economic uncertainty, leaves it well positioned to respond to future challenges.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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